Since 26 October 2010, government bond spreads in Ireland, Greece, Portugal, and to a limited extent Italy, have risen noticeably reflecting an increased risk of default. In that regard, the financial markets have focused more heavily on Ireland, given their weak macro-economic fundamentals and the lack of formal international financial assistance. Unfortunately, many analysts are too quick to talk about ‘debt default’ whereas in truth there are many more financial options most countries will explore before they consider defaulting. This includes, applying to the IMF for finance or looking to restructure their debt.
Over the weekend, the Finance Minister of Ireland indicated that the country would apply for international financial assistance. The European Central Bank (ECB) and the International Monetary Fund (IMF) both released statements indicating that they are willing to over financial assistance to Ireland.
The statement from the ECB said “[we] welcome the request of the Irish Government for financial assistance from the International Monetary Fund, the European Union and euro-area Member States. The ECB concurs with the Commission, Ecofin Ministers and the Eurogroup that providing assistance to Ireland is warranted to safeguard financial stability in the European Union and in the euro area”. The IMF said, "at the request of the Irish authorities, the IMF stands ready to join this effort, including through a multi-year loan. An IMF team, currently in Ireland for technical talks, will now begin to hold swift discussions on an economic program with the Irish authorities, the European Commission, and the European Central Bank."
At the close of business on Friday, Ireland's 10-year government bond was trading at a yield of 8.31%, which is 5.59% above the equivalent German 10-year bond yield. At the worst point, on 11 November, Ireland’s 10-year bond was trading at a yield gap of 6.82% over the German equivalent.
Following the events over the past weekend, it is reasonable to expect that bond yields for all southern-European states will move marginally lower over the coming weeks as the Ireland bail-out deal is concluded; although the market is still likely to remain very concerned above their fiscal positions. Ultimately, the southern-European states will probably have to look to restructure their debt given the current low or negative economic growth, the onerous debt profile and the current high cost of borrowing.
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